Nothing is more aggravating to consumers, financially, than overdrawing their checking account. To avoid the harsh financial penalties associated with checkbook errors, some consumers opt in for overdraft protection. Depending on what kind of protection you choose, those penalties and processes may differ in consequence and severity.
What’s an overdraft?
When you spend or withdraw more money than what is available in your checking account, you are penalized by the bank with an overdraft fee. This includes debit card transactions, credit transactions, checks, automated payments, and automated debits. The national average for overdraft fees is about $30, but many areas of the country are much higher. You are also usually charged a “returned check fee” by the organization or business that cashed the check. This is not good financial management, and hits hardest at a population that is already financially vulnerable.
In past years, there were good reasons for overdraft fees because the bank didn’t want to be left on the hook honoring a check that was written for more than the balance of someone’s checking account. Since 2010, financial institutions must get your permission before they can charge a fee for an overdrawn account.
If you give your permission and opt in to the “courtesy” (automatic) plan, the bank will cover an overdraft (at their discretion) and charge a fee. You will pay back the shortfall plus the overdraft fee. If you opt out, the bank will decline any transaction that is over the existing balance in your checking account. That’s because banks have the ability to stop debit card and credit card transactions at the point of sale for any transactions that would go over someone’s limit.
What’s the problem?
The problem starts when customers aren’t informed of an overdraft until after the ATM or point-of-sale transaction has taken place. Then the courtesy overdraft protection service that you may not have fully understood kicks in, ultimately costing you big bucks. Unless you read the fine print on your brochure from the bank and opt out of the service, it’s there and it is punitive. You may be charged multiple fees in a day if other transactions come through, no matter how miniscule.
Better Options
Most financial institutions(PDF) offer less expensive ways to deal with overdrafts than the “courtesy” protection plan. Consumer advocates recommend a different form of overdraft protection. It is usually offered when a checking account is opened. It involves an agreement you sign with the bank. Your checking account can be linked to another account at the bank, such as a credit card or a savings account. When the checking account is overdrawn, they will tap into that account. Usually the average fee associated with one of those accounts is $5.
Bottom Line
• Be aware of the balance in your checking account at all times.
• Remember when (if) payments are scheduled to be withdrawn, so that you have enough to cover them.
• If you tend to run close to the bottom with your checking account balance, consider the better form of overdraft protection (not courtesy/automatic).
